Global corporate earnings: wind beneath my wings

Richard explains why we see earnings improving across the globe, and highlights the markets with the most potential for further earnings growth.

Companies are reporting encouraging results around the world. We expect earnings to improve further, especially in Europe and Japan, as the benefits of reflation—rising wages, growth and inflation—are spreading beyond the U.S. The chart below illustrates the earnings growth momentum in markets outside the U.S.

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The chart shows that earnings estimates have been revised up for companies in Japan, emerging markets and Europe since late 2016. Meanwhile, the estimates for U.S. companies have been revised down moderately. Japan has outpaced other markets with its sharp upward trajectory.

Here to stay: earnings momentum

Global earnings are posting some of their best joint performance in the post-crisis environment. We expect this trend to extend as world growth gains momentum. Our BlackRock GPS, which gives a forward view of growth expectations, signals upside surprises for Japan, France and Germany. We believe this growth will translate into even stronger earnings in these markets over coming quarters, similar to the U.S. experience in the second half of 2016.

Japan’s earnings are particularly impressive. The December quarter’s pre-tax profits rose 11% on the year to the highest level in a decade. The rebound in commodity prices, a softer euro and stronger economic growth are setting European earnings on course for the best quarter since 2011. But investors are just warming up to Japanese or European shares—one reason we favor both over the U.S. Our proprietary data show long positions in both Europe and Japan remain limited, suggesting more room for investors to step in.

Two sector trends stand out globally: steeper yield curves and improving net interest margins have boosted profits for global financials, while long-term demand trends lifted technology revenues. Management sentiment, which we capture by text mining company conference calls, reflects an upbeat and improving outlook in these sectors.

Read more market insights in my Weekly Commentary.

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.

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